Was the 1980s market too bullish on strategic takeovers?
The increase in combined values of bidders and targets in strategic acquisitions means either that large joint profit gains that we do not measure are realized or that the stock market in the 1980s, like the stock market in the 1960s, was excessively bullish on takeovers. Bustups
How much value do takeovers add to the stock market?
During the period when these takeovers yielded very substantial value, the stock market roughly tripled. If one simply bought the S & P 500 stocks on 25 percent margins, one would have seen the money increase tenfold. Not even the KKR buyout fund has turned in such a perfor- mance.
Do hostile takeovers affect shareholders of target companies?
While most articles and books view such events from the perspective of investment bankers and corporate officers, little has been written about the impact of hostile takeovers on shareholders of target companies.
Which universities had the most hostile takeovers in the 1980s?
Hostile Takeovers in the 1980s: The Return to Corporate Specialization SANJAI BHAGAT University of Colorado ANDREI SHLEIFER University of Chicago ROBERT W. VISHNY University of Chicago Hostile Takeovers in the 1980s: The Return to Corporate Specialization
When did most acquirers diversify?
What does failure of conglomerates suggest?
About this website
What occurred as a result of a wave of hostile takeovers in the 1980s?
Abstract. The takeover wave of the 1980s moved large enterprises toward specialization and away from the diversification of the 1960s. The easy availability of funds made acquisitions affordable, while the hands-off antitrust policy allowed mergers between two firms in the same industry.
What happens to share price after a takeover?
When one company acquires another, the stock price of the acquiring company tends to dip temporarily, while the stock price of the target company tends to spike. The acquiring company's share price drops because it often pays a premium for the target company, or incurs debt to finance the acquisition.
What happens to shares in a takeover?
Cash or Stock Mergers In a cash exchange, the controlling company will buy the shares at the proposed price, and the shares will disappear from the owner's portfolio, replaced with the corresponding amount of cash.
Do hostile takeovers increase share price?
Key Takeaways. The target company in a hostile takeover bid typically experiences an increase in share price. The acquiring company makes an offer to the target company's shareholders, enticing them with incentives to approve the takeover.
What happens to your stock if the company is bought?
If the buyout is an all-cash deal, shares of your stock will disappear from your portfolio at some point following the deal's official closing date and be replaced by the cash value of the shares specified in the buyout. If it is an all-stock deal, the shares will be replaced by shares of the company doing the buying.
What happens to stock when a company is merged?
Whatever the exchange ratio in a stock-for-stock merger, shareholders of both companies will have a stake in the new one. Shareholders whose shares are not exchanged will find their control of the larger company diluted by the issuance of new shares to the other company's shareholders.
What does a takeover mean for shareholders?
A takeover occurs when one company makes a successful bid to assume control of or acquire another. Takeovers can be done by purchasing a majority stake in the target firm. Takeovers are also commonly done through the merger and acquisition process.
Are acquisitions good for shareholders?
While some transactions translate into an almost immediate boost to shareholder value, some acquisitions, particularly those which are hostile in nature, lead to costs escalating far above initial projections. This means it may take much longer for shareholders to see increased value than originally expected.
Should I sell before a merger?
If an investor is lucky enough to own a stock that ends up being acquired for a significant premium, the best course of action may be to sell it. There may be merits to continuing to own the stock after the merger goes through, such as if the competitive position of the combined companies has improved substantially.
Which of the following happens when the target company of a hostile takeover sells its most valuable assets to reduce its attractiveness to the hostile bidder in an acquisition?
The Crown Jewel Defense strategy in mergers and acquisitions (M&A) is when the target company of a hostile takeover sells its most valuable assets to reduce its attractiveness to the hostile bidder.
What are the benefits of hostile takeover?
Benefits of hostile takeovers Further benefits of acquiring an organization include increased revenue, enhanced efficiency, and lessened competition. When acquired companies maintain operations, there are greater overall earnings reports for both the acquirer and acquired from the combined revenues.
Do stocks Go Up After acquisition?
As a rule, acquisitions tend to drive up the value of a target company's stock. The rationale here is clear: buyers are invariably forced to pay a premium (i.e. a price above the current market price) to acquire the company.
Should you sell stock before a merger?
If an investor is lucky enough to own a stock that ends up being acquired for a significant premium, the best course of action may be to sell it. There may be merits to continuing to own the stock after the merger goes through, such as if the competitive position of the combined companies has improved substantially.
The Comeback of Hostile Takeovers
A Hostile World (Again) In the 1980s, they became all the rage: hostile takeovers. Boards lived in fear of “corporate raiders” like Carl Icahn. For example, in 1988, there were no less than 160 unsolicited takeover bids for U.S. companies. The hostile takeover became the defining symbol of U.S. style capitalism, encapsulated in the 1987 […]
How does a takeover affect shareholder wealth?
to account for the wealth gains. If, on the other hand, bidding share- holders lose, a smaller shareholder wealth increase is left to explain. Many argue that competition between actual and potential bidders, as well as the ability of target shareholders to "free ride" on gains, ensures that most of the gains in takeovers accrue to the target firm's shareholders. Bidding shareholders gain from a takeover to the extent that there is a component to the value gain that is not lost through competition and cannot be appropriated by target shareholders. Such bidder gains might be particularly large when the bidder and the target are in the same industry, and special opportunities to the given merger are not available to other bidders. Considerable evidence, however, shows that many mergers are driven by managerial rather than share- holder objectives, which make bidding firms willing to overpay for the acquisition targets. Overpayment, of course, leads to negative returns to bidding shareholders. The evidence is that the bidders just about break even, but the findings vary by time period and the type of acquisition. No studies examine bidder returns in hostile takeovers; the only proxy for such evidence is the finding for tender offers. In the 1980s, bidders in tender offers lost small amounts of wealth on average.3 This evidence suggests that many acquisitions are driven by the objectives of managers rather than of shareholders, so that managers are willing to overpay for the targets to pursue their own goals. In a sample of mostly friendly acquisitions, Randall Morck, Andrei Shleifer, and Robert Vishny find that bidding shareholders are more likely to lose when acquisitions serve managerial objectives, such as diversification and pursuit of growth.4 Since there are many "strategic" acquisitions in our sample, we examine the changes in the wealth of bidding shareholders as one potential source of gains of the target firms' shareholders.
How much of the takeover premium is labor cost savings?
Although the means should be cut by about 61 percent for the sample of all takeovers because in 33 cases there is no evidence of layoffs, the five-year labor cost savings can explain about 11 percent of the premium in an average takeover and permanent labor cost savings can explain perhaps 26 percent. With a 5 percent rather than a 10 percent discount rate, these numbers would be 12.5 percent and 52 percent, respectively. On the other hand, if the marginal product of laid-off workers is one-half of their wage rather than zero, the savings should be cut in half. Labor cost savings are thus only a moderate source of takeover gains. In table 3 white- and blue-collar workers are grouped together. They are separated in tables 4 and 5. For 13 companies out of 21 we can identify white-collar layoffs, and for 12 out of 21 we can identify blue- collar layoffs. In cases where we could identify them, blue-collar layoffs average 1,493 workers, or 6.5 percent of the firm's total work force, and save an average of 11. 1 percent of the premium using a five-year horizon and 29.2 percent if the gains are permanent. Among the 12 firms for which we have numbers, white-collar layoffs average 660 employees, or 3.2 percent of the firm's total work force, which can justify 33.6 percent of the premium on average using a five-year horizon and 88.3 percent using a perpetuity. Since white-collar wages are as- sumed to be higher than blue-collar wages, the estimated savings from white-collar layoffs are higher than those from blue-collar layoffs even though the layoffs themselves are smaller. White-collar layoffs are smaller in number and as a percentage of the total labor force than blue-collar layoffs, but of course the white- collar labor force is on average much smaller than the blue-collar labor force of a firm. Virtually all laid-off white-collar workers in our sample are managerial and professional, a group that constitutes 25 percent of U.S. manufacturing employment, compared with 61 percent for pro- duction workers and 14 percent for clerical and sales. If we assume that our sample firms have a similar occupational structure, we can infer that the probability of layoff for white-collar workers is about 20 percent higher than for blue-collar workers.28 Because we have several outliers, it might be better to look at median layoff numbers that are
How do takeover organizers profit?
First, the target might have been underpriced in the stock market to begin with, and so if a bustup occurs at fair market prices, takeover organizers can profit by unbundling undervalued divisions. This theory of divestitures based on undervaluation of conglomerates has been tested by Dean LeBaron and Lawrence Speidell.18 They compute breakup values of conglomerates by applying price-earnings multiples of un- diversified firms in the same industry as each division of the conglom- erate to the earnings of that division and adding up the divisions. They find that this breakup value of conglomerates is typically higher than the market price. They do not take into account the possibility that divisions of conglomerates might be getting lower multiples because they grow less fast or invest in projects with negative net present value. Nonetheless, their analysis is suggestive. Second, if the diversified company sold for a fair market value under its old management, it must be that the pieces are worth more to the buyers than they are to the takeover artist or under the old management. One such group of buyers, incentive-intensive organizations such as management buyout teams or investment companies, can improve the cash flow by reducing tax payments, cutting investment and employ- ment, and taking other steps to reduce costs. In these cases, the higher cash flow comes from more effective management and not from com- bining two related firms. To be sure, we still cannot conclude in these cases that the primary source of value gains is efficiency improvements rather than wealth transfers. A second type of buyer to whom divisions of a target firm could be especially valuable is a strategic buyer with his own operating company who can either exploit the combination of the two firms or is simply willing to overpay for the division. Such strategic buyers are in fact much more common than divisional MBOs, and selloffs to them are probably the main reason that bustups are profitable. Just as with initial acquisitions by strategic buyers, it is not known whether these selloffs to strategic buyers improve efficiency or just redistribute wealth away from consumers, suppliers, or other firms in the industry.
What does Jensen argue about takeovers?
Jensen argues that takeovers stop target firms from investing their surplus cash in negative net present value projects.2 " The takeover gains
What are the sources of target shareholders' gains in hostile takeovers?
What is the source of target shareholders' gains in hostile takeovers? The literature offers a wealth of theories of the sources of takeover gains in general. One possibility is simply that the stock market under- prices the target, so that no operational changes are actually needed for the bidder to profit from the acquisition. Another possibility is that bidding firms overpay for their targets, perhaps because acquisitions serve the objectives of managers and not of shareholders. In these cases the target shareholders' gains are the bidding shareholders' losses. Con- sistent with this view is the evidence of David Ravenscraft and F. M. Scherer that the earnings of acquired lines of business in the friendly takeovers of the 1960s and 1970s did not rise.1 Although underpricing and bidder overpayment might be important, they are probably not the whole story in hostile takeovers. For example, Steven Kaplan shows that cash flow (net of capital expenditures) rises significantly in his sample of LBOs.2 Moreover, substantial anecdotal evidence also indicates that hostile takeovers are followed by large operational changes in many firms. Accordingly, we first deal with the role of wealth changes in bidding firms' shareholders, and then describe some potentially important changes that can justify takeover premiums, as well as discuss how these sources fit into existing takeover theories. Wealth Change of Bidding Shareholders Target shareholders in hostile takeovers clearly gain significant wealth, but less is known about bidding shareholders. If they gain as well, then the analysis of operational changes must come up with greater savings
How can labor cost savings be used to increase cash flow?
Labor cost savings can therefore be one of the most effective ways to increase cash flow. Such savings can take a number of forms, including layoffs, early retirements, hiring freezes, wage reductions, reductions in future pension benefits, and other cuts in compensation. If some of the employees in the firm are paid more than their marginal product, then laying them off or cutting their pay can increase the cash flow and so justify some of the premium. Previous studies have examined the extent of labor cost savings. Joshua Rosett considers wage reductions of union employees and finds that they can explain, at most, 9 percent of the takeover premium.9 Interestingly, up to 21 percent of the premium can be explained for the subsample in which the chief executive officer changes after the take- over. However, the wage changes are not reliably different from zero in most specifications. Andrei Shleifer and Lawrence Summers present evidence of substantial wage reductions in one hostile takeover-Icahn's acquisition of TWA-that are large enough to more than justify the takeover premium. 10 They have only one famous case, however. Wages, of course, are not the only form of compensation. Jeffrey Pontiff, Andrei Shleifer, and Michael Weisbach present evidence of reversions of excess pension assets following hostile takeovers, and
How to justify takeover premium?
One of the most direct ways for the acquirer to justify the takeover premium is to lay off employees and save on labor costs. The oppor- tunities for layoffs are considerable: consolidation of headquarters, white- collar employment cuts due to selloffs, closing of plants, consolidation of production, and many others. Because labor costs are so high relative to profits, the effect of such savings on the market value can be sub- stantial. Our measure of layoffs is the sum of layoffs and early retirements from the retained divisions that can be attributed to the target company, as reported by any of our sources. We use documented evidence of early retirements in only two cases (Gillette and Owens Corning); the vast majority of observations are layoffs. All types of layoffs are grouped together-those from plant closings, staff reductions, consolidations, and so forth. However, in most cases we can distinguish between white- and blue-collar layoffs. Most of the information on layoffs comes from the Wall Street Journal, although other sources are sometimes used. In two cases, where we saw reports of layoffs but did not have the numbers,
Why did Papa John's stock drop after the takeover?
The elevated stock price tumbled a few weeks after the takeover threat subsided, in part, due to legal struggles with Schnatter. 2
What is the bottom line of hostile takeovers?
The Bottom Line. Much has been written, often in dramatic and ominous language, about hostile takeovers and the various steps companies take to prevent them. While most articles and books view such events from the perspective of investment bankers and corporate officers, little has been written about the impact of hostile takeovers on shareholders ...
How can a strategic acquisition be beneficial?
Compared to increasing debt, making a strategic acquisition can be beneficial for shareholders and can represent a more effective option for averting a takeover. A company's management can acquire another company through some combination of stock, debt, or stock swaps. This will make the corporate raiders' takeover efforts more expensive by diluting their ownership percentage. Another advantage to shareholders is that if the company's management has done its due diligence in selecting a suitable company to acquire, then shareholders will benefit from long-term operational synergies and increased revenues.
Why do companies have a staggered board?
Since the raider is eager to fill the company's board with directors that are friendly to the takeover plans, having a staggered board means that it will take time for the raider to control the company via a proxy fight. The target company is hoping the raider will lose interest rather than engage in a protracted fight. While employing a staggered board of directors could benefit company management, there is no direct benefit to shareholders.
Why do companies increase their debt?
A company's management can deliberately increase its debt as a defensive strategy to deter corporate raiders. The goal is to create concern regarding the company's ability to make repayment after the acquisition is completed. The risk, of course, is that any large debt obligation could negatively impact the company's financial statements. If this happens, then shareholders could be left bearing the brunt of this strategy as stock prices drop. For this reason, increasing debt is generally seen as a strategy that in the short term helps the company avert a takeover, but over time could hurt shareholders.
How can a company acquire another company?
A company's management can acquire another company through some combination of stock, debt, or stock swaps.
When did the IRS stop greenmail?
In order to discourage greenmail, the U.S. Internal Revenue Service (IRS) enacted an amendment in 1987 that places a 50% excise tax on greenmail profits. 5
What happens to stock in a reverse merger?
Through the transaction, it can avoid many of the legalities and expenses that come with taking a company public through an IPO.
What happens to my stock after a merger and how to calculate stock price?
In the case of non-publicly traded stock, the answer to this question depends to a great extent on what was agreed to in the terms of the merger.
What happens if you haven't earned stock?
Unfortunately, in most cases, your unvested stocks will simply be cancelled altogether.
What happens if a company believes a deal will destroy value?
On the other hand, if they believe the deal will destroy value, they’ll begin offloading their stock, pushing down its value. In either case, there’s usually an element of judgement required, and sometimes onlookers are split over whether the deal will create or destroy value for the buying firm.
What happens if a merger is not successful?
But if they believe that the merger won’t be a success, the stock price of the new company will be worth less than the stock of the individual entities before the transaction occurred.
What is the reaction of a target company to a bid?
Target company stock’s reaction to a bid. As a rule, acquisitions tend to drive up the value of a target company’s stock. The rationale here is clear: buyers are invariably forced to pay a premium (i.e. a price above the current market price) to acquire the company.
Why is it important to mention a company as a target for an acquisition?
The mere mention that a company has become a target for an acquisition is usually enough to generate volatility in the stock price of both the buyer and the seller, as traders and analysts try to establish what the deal means for strategy, how the buyer is going to pay for it, whether the target company is friendly or hostile to the takeover and whether it might even trigger a bigger offer from a third party.
When did most acquirers diversify?
firms after years of diversification. In the 1980s, most acquirers
What does failure of conglomerates suggest?
failures of conglomerates suggest that performance is likely to
Shareholders' Rights Plans
Voting Rights Plans
- A voting rights plan is a clause a company's board of directors adds to its charter in an attempt to regulate the voting rights of shareholders who own a predetermined percentage of the company's stock. For example, shareholders may be restricted from voting on certain issues once their ownership exceeds 20% of outstanding shares. Management might use voting rights plans as a …
Staggered Board of Directors
- This defensive tactic hinges on making it time-consuming to vote out an entire board of directors, thus making a proxy fighta challenge for the prospective raider. Instead of having the entire board come up for election at the same time, a staggered board of directors means that directors are elected at different times for multi-year terms. Since the raider is eager to fill the company's boa…
Greenmail Option
- Greenmailis when a targeted company agrees to buy back its shares from the prospective raider at a higher price in order to prevent a takeover. The term is derived from combining "blackmail" with "greenbacks" (dollars). In exchange for receiving the premium, the raider will agree to halt attempts at a hostile takeover.
White Knight, Strategic Partner
- A white knightstrategy enables a company's management to thwart a hostile bidder by selling the company to a bidder they find more friendly. The company sees the friendly bidder as a strategic partner, one who will likely keep the current management in place and who will provide shareholders with a better price for their shares. In general, a white knight defense is seen as be…
Increasing Debt
- A company's management can deliberately increase its debt as a defensive strategy to deter corporate raiders. The goal is to create concern regarding the company's ability to make repayment after the acquisition is completed. The risk, of course, is that any large debt obligation could negatively impact the company's financial statements. If this happens, then shareholders …
Making An Acquisition
- Compared to increasing debt, making a strategic acquisition can be beneficial for shareholders and can represent a more effective option for averting a takeover. A company's management can acquire another company through some combination of stock, debt, or stock swaps. This will make the corporate raiders' takeover efforts more expensive by diluting their ownership percent…
Acquiring The Acquirer
- This defense is often referred to as the Pac-Man defense, after the popular video game. The target company staves off the unwanted advances of the acquiring company by making its own bid to take control of the acquiring company. The approach is rarely successful and runs the risk of saddling the company with a large acquisition debt. Shareholders may end up paying for this …
Triggered Option Vesting
- A triggered stock option vestingis a clause the board of directors adds to the company's charter that activates when a specific event occurs, such as the acquisition of the company. The clause states that should there be a change of control in the company, all unvested stock options vest automatically and must be paid out to the employees by the acquiring company. This tactic war…
The Bottom Line
- The use of poison pills and shark repellent is on the decline, and the percentage of Standard & Poor's 1500 Index companies with a poison pill clause in place fell to 4% at the end of 2017. By contrast, 54% of companies had one in 2005.8 The S&P 1500 index combines the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600.9 The decline in popularity is attributable to a num…